DIARY OF A PORTFOLIO MANAGER
RATES
North American equity markets have continued to push higher through the first month of the year. Given the anticipation for lower interest rates, all eyes remain focused on the world's central banks. This past week, the Bank of Canada decided to maintain interest rates at existing levels, as we expected. Bank of Canada Governor Tiff Macklem emphasized that it's too soon to talk about rate cuts, a subtle shift in his language suggested growing confidence that inflation's downward trajectory could be maintained in the current rate environment.
The market seemed to be pricing in rate cuts at a certain rate and now at a lower rate. I don’t see why rates would be cut in 2024 but it is only January so economic data could change my mind over the next few months.
SHIPPING
Two of the world's most important shipping channels, the Suez Canal in the Red Sea and the Panama Canal, have faced major disruptions in recent months. The Suez Canal is estimated to account for more than 10% of global trade and is especially crucial for trade between Europe and Asia. The passage has been compromised by Houthi rebels in Yemen who began attacking ships in November, prompting military responses from the U.S. and U.K.
Traffic through the canal has declined substantially as shipping companies have re-routed vessels around the southern tip of Africa, a detour which invariably takes longer and costs more.
DROUGHT…AND MORE SHIPPING
Meanwhile, a severe drought has resulted in historically low water levels and meaningfully reduced traffic capacity in the Panama Canal. While it accounts for a smaller amount of global trade than the Suez, the Panama Canal's disruption more directly impacts the Americas, and the United States in particular, as it represents a key trade route with Asia. These shipping disruptions have resulted in a sharp increase in some shipping costs in recent months, which marks a significant change from the declines witnessed over the past few years. Higher freight rates may have limited effect for the time being as many companies are shielded by longer-term shipping contracts. However, there have been a few signs of supply chain disruptions emerging in certain industries. For example, some European car manufacturers have paused production due to delays in receiving auto parts from Asia.
I thought we would be past supply chain disruption talk at this point in 2024??
While longer transit times and elevated shipping prices may persist near-term, there are some reasons to believe transportation costs may not reach the extremes witnessed just a few years ago. Firstly, the pandemic-induced supply shock led many companies to diversify their supply chains and hold more inventory, which may leave them somewhat less vulnerable to major disruptions. In addition, new shipping capacity is coming online as vessels ordered during the pandemic and built over the past few years finally become ready to sail. Moreover, demand for goods is expected to remain weaker than a few years ago because of the impact of higher interest rates.
EARNINGS
Lots of earnings this week. Next week, we will see earnings from companies with over $10 trillion in market capitalization. Will be very interesting. Earnings so far have been decent, for the most part. I often say that, over time, earnings are what matter the most.
Have yourself a great weekend,
